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Alcoa aims to be No. 1 again

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With its bid for Alcan, North America's largest metals producer has put itself squarely in the firing line. The shape of North America's aluminum industry might never be the same.

Alain J.P. Belda, Alco

While Alcoa Inc.'s $33-billion cash-and-share bid for Canadian rival Alcan Inc. might become a lesson in the law of unintended consequences, one thing seems almost certain whatever the result of the hostile bid, the North American aluminum landscape will be altered as one or both companies emerge in different form.

Should the recent current bid succeed—unlikely, with Alcan's stock trading almost $10 higher than Alcoa's offer—there will almost certainly have to be divestitures to satisfy antitrust concerns.

First on that list would be aerospace plate, where both companies hold leading positions and have recently completed expansions, followed possibly by packaging, which would be less traumatic since Alcoa had already effectively placed its packaging operations under review.

Should the bid fail, then both companies essentially remain targets. Analysts agree that by making its bid, Alcoa put both itself and Alcan in play. One analyst suggested that it is unlikely that Alcoa and Alcan could both remain as standalone companies.

Alcoa's bid also turned a sharp spotlight on valuations and opened a Pandora's box of speculation on rival bidders, a list that includes nearly every major mining company on Earth BHP Billiton, Rio Tinto, Anglo American Plc, Cia. Vale do Rio Doce, Xstrata Plc, Norsk Hydro ASA, United Co. Rusal and Hindalco Industries Ltd. There also are unnamed Chinese interests and a few private equity firms, along with several companies mentioned as potential joint bidders whose motives—buy Alcan or gain leverage in the Indian or Chinese markets—were not always clear. With each potential suitor there is a different set of antitrust issues and potential national concerns, which could yield a significantly different Alcoa or Alcan—or both.

As each day passed, more and more analysts at investment banks became conflicted about speaking on the issue, suggesting that one by one they were being engaged by potential suitors to run the numbers and prepare bids.

The valuation game laid bare some of Alcoa's and Alcan's strengths and weaknesses. A sum-of-the-parts valuation of Alcan performed by Davenport Equity Research showed Alcan to be worth $81 per share, just shy of the company's then stock price without a takeover premium factored in.

Alcoa, on the other hand, has been criticized for its languishing stock price, one of the catalysts of the bid in the opinion of many. Valuations of Alcoa showed a sprawling conglomerate with disparities between profitable segments like aerospace and lagging units like packaging, begging the question of a breakup.

In addition to unlocking value, Alcoa also was driven by international competition. In announcing the bid, Alain J.P. Belda, chairman and chief executive officer, cited a significantly changed industry with emerging global players in Russia, China, India and the Middle East who are quickly expanding and adding capacity, a thinly veiled reference to Rusal, China Aluminum Co. Ltd., Hindalco and Dubai Aluminium Ltd. In order to compete, North America needs a larger aluminum champion capable of battling other international giants, lending credence to the theory that neither company could survive alone.

Whatever the outcome, it is unlikely that either Alcoa or Alcan will emerge unchanged. "I see this as the opening move in a chess game involving multiple moves and multiple players," one analyst said of the bid. "There are a number of ways it could play out, but only one benefits Alcoa management. The outlook is better for Alcoa shareholders than for Alcoa management."

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